Business Law & Taxation

Special Contract /
Contract of Agency

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(Business Law and Taxation Team)
 Business Law & Taxation

Contract of Agency
• Agent and Principle
An agent is the person who is employed to act for another. The person for whom the act is
done, called principle. The contract which creates the relationship of principle and
agent is called agency. The agent is authorized to create a contract between his principle
and third party.
e.g. A appoint C to buy 10 bags of sugar on his behalf. A is the principle and C is the agent.
The contract between two is the agency.

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 Business Law & Taxation
Contract of Agency

• Essential of Agency

1. Agreement
2. Who Can be Principle
3. Who can be Agent
4. Consideration not necessary
5. Intention

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 Business Law & Taxation
Essential of Agency

1. Agreement
The relationship of an agency is the result of an agreement between the principle
and the agent. The contract of agency can be express or Implied by the conduct of
the both parties.

2. Who can be Principle

Any person who is at the age of majority according to law to which he is subject and
who is of sound mind, may employee and agent.

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Essential of Agency

3. Who can be Agent

Any person may become an agent. It mean a minor or a person of unsound mind can
be appointed as an agent. A minor as agent can bound the principle to the third
party. But a minor is not himself liable to his principle.

4. Consideration not necessary

In order to create an agency, the consideration is not necessary. Consideration may
or may not exist in agency. The fact that the principle has agreed to be represented
by the agent is consideration for principle to support the contact.

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Essential of Agency

5. Intention

The agency must have intention to act on behalf of principle. When the agent entries
into a contract for himself, the principle is not liable. The principle is liable only
when the agent contracts with the intention to act on behalf of the principle.

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Duties of an Agent

1. Duty to Follow Direction of Customs

2. Duty to work with reasonable Skills
3. Duty to render accounts
4. Duty to Communicate
5. Duty to terminate of Agency
6. Duty not to deal with his on Act
7. Duty not to make secret profit
8. Duty to pay sums received
9. Duty not to delegate Authority

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 Business Law & Taxation
Duties of an Agent

1. Duty to Follow Direction of Customs

The agent is bound to conduct the business activity according to the instruction of
Principle. If Principle does not give any instruction than he should follow the custom
of trade. If he does not act according to prevailing customs, he will be liable for any
loss sustained by the principle.
e.g. A, the principle, instruct his agent B to insure the goods. B neglect to do so, B is
liable to compensate if the goods get damaged.

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Duties of an Agent

2. Duty to work with reasonable skill

The agent work with reasonable skill and diligence. Reasonable skill mean the skill
that can be possessed by an ordinary man. If the agent does not work with reasonable
skill and diligence, he must compensate his principle for in respect of loss arising
there from.

e.g. A as an agent sell goods on credit to B without making proper inquiry about sol-
vent of B. B is insolvent at the time of sale. A must compensate his principle for loss.

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Duties of an Agent

3. Duty to Render accounts

An agent is bound to render his account to his principle on amount. It is duty of an

agent to maintain a true accounts regarding all the property or money belonging to
his principle.

e.g. Y send goods to his agent X to sell on credit. X must keep proper accounts of sale
and render to Y on demand.

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Duties of an Agent

4. Duty to communicate

It is duty of an agent, in case of difficulty to use a reasonable diligence in communi-

cating with his principle and in seeking to obtain his instructions.
But if it is impossible to communicate to the principle, the agent can act on his own
in the best interest of his Principle.

e.g.P send goods to his agent A in Karachi for the purpose of export. A find that some
goods are damaged. A must inform P to get instruction in this regard.

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Duties of an Agent

5. Duty on termination of Agency

When an agency terminated due to death or insanity of principle, the agent must
take reasonable steps for the protection of interests of the legal representative of
late principle.

e.g. Y, an agent sells goods to his Principal P to X on credit. The agency terminates, Y
must collect and remit the amount to legal representative of P.

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Duties of an Agent

6. Duty not to deal with his on Act

If an agent deal on his own account in the business of agency without obtaining
proper permission of the principle, the principle may reject the transaction. If it
appears that any material fact has been concealed from him by the agent and he has
earned any profit, the principle may claim such profit.

e.g. A direct his agent to buy a certain house. B buys it for himself, A can cancel the
contract

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Duties of an Agent

7. Duty not to make secret profit

An agent should not make any secret profit out of the agency. If the agent earns any
secret profit. The principle can recover it form agent. Moreover, the principle may
refuse to pay commission and terminate the agency. The agent, however can recover
all money due to himself in respect of his remuneration and other expense, if any.

e.g. A direct his agent B to buy a certain house. B buys house and earn some secret
profit. B is liable to pay secret commission to A.

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Duties of an Agent

8. Duty to pay sum received

Any amount an agent received on behalf of the principle must be paid to the princi-
ple . However, an agent can deduct his expense and remuneration from it.

e.g. A appointed B to collect rent from X. B collected rent and incurred Rs 200 as
traveling expense. B must remit the amount to A after deduction his traveling ex-
pense.

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Duties of an Agent

9. Duty not to delegate Authority

An agent must perform the work of agency himself. An agent must not delegate his
authority to another person. However, the following are some exceptions to this
rule.
a) When the principle has permitted to delegate the authority
b) When the ordinary custom of trade, a sub agent can be appointed.
c) When the nature of agency makes it necessary to appoint a sub agent.
d) When an emergency arises which permit delegate the authority
e.g. P appoint A as his agent to buy a certain house. A delegates the authority to X to
buy a house for P. A is not allowed to delegate authority to X.

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Rights of Agent

Rights of Agent

1. Right to retain (Principe Money)

2. Right to receive remuneration
3. Right to Lien (retain goods)
4. Right to indemnified for lawful acts
5. Right to indemnified for acts in good faith
6. Right to compensate for injury
7. Right to stoppage of goods

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Right of Principle

Right of Principle

• Right to recover damages

• Right to obtain secret profit
• Right to Refuse indemnify Agent

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Duties of Principle

Duties of Principle

• Duty to Indemnify for Lawful acts

• Duty to Indemnify for Acts in Good faith
• Duty t Indemnify for Injury by Principle’s Neglect
• Duty to Pay remuneration and dues

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Indemnity and Guaranty

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Indemnity and Guaranty

• The Term Indemnity means to compensate the loss.

• The contract by which one party Promises to save other party from loss caused by
him by the conduct of the promisor himself or by the conduct of any other person
is called a contract of indemnity.
1. Indemnifier
The person who makes the goods the loss (Promisor) / Who pays for the loss
2. Indemnified
The person whose loss is to be made (Promisee)/ Who receive the compensation
e.g. A parked the car at a car parking, A lost the token issued by B. B refuse to release
the car. A promise to make any lost may suffer if any other person claim the car.

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Indemnity and Guaranty

• Essential of Contract of Indemnity

Following are the essential of a valid contract of indemnity

1. It must contain all essentials of a valid contract

2. It is contract between two parties. One person promises to save other from any
loss he may suffer.
3. The loss may be caused by the conduct of the promisor or any other person
4. The contract of indemnity can be expressed of Implied.

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Indemnity and Guaranty

• Rights of Indemnity Holder

1. He can recover all damages which he may be compelled to pay in respect of any suit
filed against him.
2. He may recover expense in respect of any suit filed by the authority of indemnifier.
3. He can recover all expense which he might have paid as a result of any compromise
which was made with the consent of indemnifier.

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Indemnity and Guaranty

• Rights of Indemnifier

There is no provision in Law about the right of indemnifier. However, the right of
indemnifier are the same as the right of guarantor. It is principle of law that where no
person has agreed to indemnify other, the right will be similar to the right of
guarantor.

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 Business Law & Taxation

Contract of Guarantee

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 Business Law & Taxation
Contract of Guarantee

• A contract of Guarantee is the contract to perform the promise or discharge the li-
ability of a third person in case of his default.
• The contract of guaranty is made to enable a person to get loan, goods on credit,
employment etc. it may be oral or written. It is a promise to perform the promise
of the other, on his failure to do so.
• The person who gives the guarantee is called surety or guarantor. The person to
whom the guarantee is given is called the creditor. The person in respect of
whose default the guarantee is given is called the principal debtor.
e.g. A requested B to lend Rs. 5 Lac to C. A guarantee that if C fails to return the loan,
A will pay to B. This is a contract of guarantee.

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Contract of Guarantee

• Essential of contract of Guarantee

1. Tripartite Contract
2. Consideration
3. Misrepresentation
4. Concealment
5. Writing not necessary

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Essential of contract of Guarantee

1. Tripartite Contract
It is an agreement between Principal debtor, Creditor and the Guarantor. Three sep-
arate contract exist among them. In a tripartite contract , the liability of surety arises
if the promise by principal debtor not fulfilled.
In the contract of Guarantee the principal debtor liable and the surety become liable
on the default of principal debtor. The primary (Principle) contract exist between
the Principal debtor and the creditor and the secondary contract exist between the
creditor and the Guarantor.
e.g. A takes loan from B on the guarantee of C. The agreement between A and B is
the primary contract and the agreement between B and C is the contract of guaran-
tee. The liability of C arises when A fails to pay the loan.

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Essential of contract of Guarantee

2. Consideration

Like other contracts, a contract of guarantee must fulfill the essential of a valid con-
tract. It must be supported by some consideration. It is not necessary that there is
a direct consideration between the surety and the creditor. The priniciple received
from the principal debtor is sufficient for the surety.

e.g. A seel goods on credit to B on C’s guarantee. C’s promise to guarantee is the
consideration for A’s promise to sell the goods.

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Essential of contract of Guarantee

3. Misrepresentation

A guarantee obtained by means of Misrepresentation made by the creditor, or with

the knowledge and assent, concerning the material part of a transaction is invalid. If
the consent of the surety is obtained by misrepresentation, the Gurantor will be dis-
charged from his liability .

e.g. H was invited, to give the guarantee for the honesty of L’s servant. L has previ-
ously dismissed his servant for dishonesty but did not disclose this fact to H. later
the servent committed embezzlement, H was held not liable.

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Essential of contract of Guarantee

4. Concealment

Any Guarantee which the creditor obtains by mean of keeping silence to material
circumstances is invalid. The expression “keeping silence” means intentional con-
cealment of the facts. The creditor should disclose to the surety the fact which are
which are likely to be affect the surety's liability.

e.g. A employee B to recover money. B misappropriate the money. Later A ask C for
surety. C unaware of B’s previous record gives guarantee for B. B again misappropri-
ates. C’s guarantee is invalid because A concealed the fact.

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Essential of contract of Guarantee

5. Writing not necessary

It is not necessary that the contract of guarantee be in the writing. The contract be
either oral or written. It may be expressed or implied.

e.g. A sells and delivered goods to B on the verbal guarantee of C. it is a valid Guaran-
tee.

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Kinds of Guarantee

• Kinds of Guarantee

1. Simple Guarantee
A guarantee which is dealt with a single debt or transaction is called ordinary, sim-
ple or specific guarantee. It comes to an end as soon as the liability under the trans-
action ends.

e.g. G guarantee K for the payments of 5 bags of wheat purchased by C. C makes the
payment. Later C again purchase 5 bags of wheat but did not pay. K sued G, Held G’s
guarantee was a specific guarantee and G is not liable.

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Kinds of Guarantee

2. Continuing Guarantee

A guarantee which extends to a series of transactions is called, continue guarantee.

In other words, a guarantee which covers number of transactions over the period is
called continue guarantee.

e.g. D guarantee C for B’s purchase to the extent of Rs. 5,000. for the next one year.
This is continuing guarantee.

From the desk of Accounting and Finance Faculty –

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 Business Law & Taxation

From the desk of Accounting and Finance Faculty –

(Business Law and Taxation Team)